The “Cadillac Tax” refers to a provision in the Affordable Care Act (ACA) that levies a 40% excise tax on “Cadillac” health plans. Like the car they are named for, “Cadillac” plans are those that contain services and features that add to their cost. It’s been suggested this tax counter-balances the tax deduction employers receive for paying for employee health care coverage. While some policy makers say that the government should eliminate the deduction, others believe that is politically impossible and find it easier to add the new tax.
The Cadillac Tax is levied when the amount employers and workers jointly pay for an employee’s health coverage is above a certain threshold — $10,200 for individual coverage and $27,500 for family coverage. One of the interesting things about the tax is that it has a very broad definition of health care coverage. Things like wellness programs or an onsite clinic or other perks that employees have grown accustomed to now must be calculated as part of the cost of health care. These are all included in the “cost of coverage” subject to the Cadillac Tax.
While there appears to be bipartisan support to repeal the tax, the political environment is highly unpredictable at this point. Our stance is that no one should assume that Congress will repeal this tax, and employers should begin to plan for what is currently the law of the land.
Most employers want to do right by their employees. They currently offer their entire range of programs and will continue making the programs available. However, employers have to make very serious decisions about providing benefits above the Cadillac Tax thresholds. Employers who decide to absorb the excise tax in order to continue providing generous benefits may be limited in the amount they can spend on wage increases or other benefits. Alternatively, employers may need to stay within the Cadillac thresholds and shift more costs to employees.
What should companies do? First, assume the tax will be passed. No one knows what the future holds. We advise our clients to start planning now to continue to be fair to employees while also controlling costs. Continuing to provide rich benefits to employees until 2018 and then reversing cost will be hard on employees and hard on the company. It is best to start looking at the options now, including review of ancillary benefits and expenses, and to begin to analyze the actual cost of coverage per person and per family. Remember that this tax will have a big impact on employers and employees over the next few years.
About the author: Ann Duke, Esq. is General Counsel with Creative Benefits, Inc. She provides consultative services to employers and their employees.